December 2009 Archives

I recently attended a 2010 Outlook for the Investment Banking and Venture Capital industries, an event hosted by Polsinelli Shughart PC . In addition to thanking Polsinelli Shughart, I'd like to acknowledge two excellent speakers featured at the event: Wayne Nielsen of W.G. Nielsen & Co. and Stephanie McCoy, most recently a venture capitalist at Meritage Funds.

Stephanie, speaking from a venture capitalist's perspective, addressed the liquidity crisis; Wayne, who made some remarkably accurate predictions last year for 2009, made 2009/2010 economic observations that contrasted the carnage of 2008 with some encouraging trends from 2009. Both speakers highlighted the lows, but followed with some signs of promise.

What everyone wants to know is: How do we work our way out of last year's economic abyss, and when do we see a light at the end of the tunnel? What is the impact that the absence of capital markets will make on the types of innovative, early stage businesses that characterize our Colorado business community, especially in the emerging business sector of renewable energy and other sectors that are at the heart of our economic health?

Here are some notes from both presentations and key takeaways from the event. Any editorial commentary is my own!

A Venture Capitalist's Perspective

• Institutional investors all but disappeared in 2008 and through much of 2009, leading to the precipitous decline in funding to the VC industry.

• Institutional commitments to venture firms were $5B year-to-date in 2009; down from $23B in 2008 and $40B in 2007. (The number was $80B in 2000).
• The number of venture investments followed suit, both in number of investments and in the size of the investments.
• Early stage companies were hardest hit. $2.4B went to 536 companies in 2009 (YTD); down from $6B invested among 2550 firms in 2008, and $7B to 2852 companies in 2007.
• Exit strategies became a memory of the past. The IPO market ground to a halt- especially for small cap firms. And as Wayne predicted, M&A activity in 2009 has declined more than 40% from 2008 and more than 80% from 2007.

The result: Companies retrenched and venture firms marshaled their remaining capital.

And there are some seemingly favorable indicators of an improvement in the venture industry, as seen in a survey of the top 100 institutional investors.

• Despite a virtual stoppage of venture sector investments, over 90% of surveyed firms indicated their intent to continue to invest in venture capital firms.
• More than 30% indicated that the level of their investment as a percentage of their allocation would increase.
• Only 6% indicated their intention to reduce their percentage exposure to venture capital investments.
• Private equity funds currently have approximately $400B in investment capital available, while commercial banks and lending institutions have approximately $1.2B in cash assets.

What's not so clear is: How much remaining capital have VC firms retained that is not likely to be limited to follow-on investments?

An Investment Banker's Perspective

There is no question that the picture here is complex. Without a healthy investment banking industry, the parties affected by the events above are absolutely affected by the lack of access to capital along the way. They are critically affected by the inability to achieve liquidity events through public markets or M&A transactions. We hear much in the press--repeatedly--about economic sectors: Retail sales and consumer confidence, low housing starts, mortgage foreclosures, the federal debt, and the implications of the bailout.

Despite Warren Buffett's admonishment, "Anyone who thinks the market knows the value of anything needs to do more homework," some indications of favorable trends include:

• The DOW, Nasdaq Composite, and the S&P 500. They're all up between 60% and 70% since March of 2009.
• Low price/earnings ratios and skyrocketing worker productivity. Decade-long highs indicate a likelihood that business profits will improve.
• Increasing U.S. manufacturing activity throughout 2009.

Physics warns us, however, that for every force there is an equal and opposite force. Many of these indicators mirror the relationship between high productivity and high unemployment, etc.

The IPO market seems to be returning.

• Q3 2009 saw an IPO volume of 20 deals producing $5.8B of equity investment.
• As of October there were 34 registrants in the IPO pipeline, up from 28 registrants seeking $7.6B on June 30, 2009.
• Only 12 companies went public in the first half of 2009; 8 were US-based.

What does this mean for Colorado and its sustainable startups?

The venture capital landscape in Colorado is experiencing some uncertainty with a number of firms in fundraising mode. Our venture investment reality is that 80-90% of venture capital comes from out of state. At the same time there's another development occurring. We are experiencing an explosive emergence of the cleantech/renewable energy sector which saw 76 Colorado companies apply to make presentations at this year's 22^nd annual NREL Industry Growth Forum. About the same number of applications came from California, and is almost double the number of Colorado-based applications from the previous year. However, while the general impression seems to be that regional firms are having difficulty raising money, the reality is a bit more mixed in my mind as evidenced by (if my facts are correct) a number of firms that have in fact raised money within the past few years: Foundry Group, Altira Group, Infield Capital, Access Venture Partners, Boulder Ventures and Meritage Funds. And there are other smaller funds emerging on the landscape. Demonstrative of a transition, Altira Group is, and has been, entirely focused on energy technology. Infield capital was formed to focus their investments on cleantech-related vehicle powertrain technologies, and Access Venture Partners has become active in the cleantech space.

During a follow on visit with Stephanie, we discussed the regional VC landscape. She agrees that, while the cleantech sector is an area of great opportunity, it's relatively immature; it struggles with uncertainties around government policies and subsidies, and developing convincing business models. We both were reminded of Colorado's cable industry during the 1970s--how it developed a critical mass here, despite regulatory challenges, and was supported by some of Colorado's most prominent venture capitalists, visionaries, and leaders.

We know that venture capital flows to great new ideas in the hands of seasoned entrepreneurs. Perhaps we're going to see a similar evolution in the cleantech space, and the influx of established energy companies will attract capital and new management talent. Do we have the necessary ingredients? I invite your views.

Social Entrepreneurship is one of the fastest-growing and most inspiring fields of entrepreneurship. Muhammad Yunus, winner of the 2006 Nobel Peace Prize - primarily for founding the Grameen Bank and spawning the concept of microfinance, suggests:  "Social Entrepreneurship is a very broad idea . . . any innovative initiative to help people may be described as social entrepreneurship." 

There is a growing appreciation that entrepreneurial approaches are most powerful in unleashing the skills of millions of people in some of the most economically challenged areas of the world.  Similar to the concepts expressed in C.K. Prahalad's book, "The Fortune at the Bottom of the Pyramid,"  social entrepreneurship is premised on legitimizing that sector of the world's population as economically important and viable. 

Student interest in social entrepreneurship at CU-Boulder has never been more enthusiastic.  CU Boulder was recently selected as an Ashoka Changemaker Campus, and cross-campus, multidisciplinary student groups are forming and convening activities pertaining to social entrepreneurship.

The Deming Center has responded to this student interest by becoming involved in various efforts on campus.  For instance, we are a part of SEED@CU - Social Entrepreneurship for Equitable Development -- an interdisciplinary field research project on social entrepreneurship.

The Third Annual Business/Social Entrepreneurship Event

The Third Annual Business/Social Entrepreneurship Event was held in Colorado Dec. 1 & 2.  Peter Kellner, named Young Global Leader in 2009 by the World Economic Forum, was the featured guest and speaker and was accompanied by Justin Rockefeller, another social entrepreneurship proponent. During this event, the City of Denver announced its partnership with Ashoka through its participation in Ashoka's "Change Your City Initiative." 

Our University hosted a follow-up event in Boulder featuring Peter as the speaker- and discussed the meaning of CU-Boulder's recent selection as an Ashoka Change Maker Campus.

Peter's lifelong mentor has been Bill Drayton, Founder of Ashoka, a "global association of social entrepreneurs," and based upon his years of association with Bill he developed a model for fostering social entrepreneurship through the creation of an organization called Endeavor.

Peter Kellner's presentation on Endeavor's accomplishments in the 11 years since its founding provided extraordinary evidence of the power of social entrepreneurship models.  Endeavor has screened over 19,000 applicants and has chosen to support 420 in the creation of their businesses - to whom they provide mentorships, networks, strategic advice, talent, skills and inspiration.

I hope you continue to share with me the excitement and deep appreciation of the enabling power of entrepreneurship. We're privileged in our mission of educating the next generation of entrepreneurial leaders who will find great opportunity in solving some of the world's great challenges in energy, health care and nutrition, and in innovating solutions for the world's developing economies.
 
Please share your thoughts and insights on how we can best nurture social entrepreneurs here in Boulder. 

When faculty members are guest speakers at our Deming Board breakfast meetings, their presentations consistently inspire some very intense and lively discussions. 

One of my favorites was a presentation entitled "Do Venture Capitalists Really Matter?" by Professor Sharon Matusik. I won't go so far as to state how the debate came out. 

Her talk underscored the notion that the Leeds School of Business has some of the most highly respected faculty in the field publishing entrepreneurship-focused research in leading academic research journals. We also have a thriving Ph.D. program, one of the most prolific in the country with more than 20 graduates, who are now established as leading scholars in entrepreneurship at universities around the country.

To learn more, take a look at our 2009 Academic Report, hot off the press.

Some takeaways from this report:

• During 2008-09 academic year more than 500 undergraduates took one or more of our entrepreneurship courses.

• Our MBA program has grown by 140% in the past three years, with more than 50% of this year's incoming class identifying entrepreneurship as their number one area of interest.

• Almost 300 MBA students took at least one of our entrepreneurship courses during the year, representing almost 33% of all of the elective courses taken by Leeds MBA students.
  

Since the creation of the Deming Center in 1995, more than 1000 students have taken our business-planning course.  This, too, is a tribute to the quality of our faculty and to their ability to bring entrepreneurship alive in the classroom.

As stated in the report, our faculty had nearly 30 research papers selected for publication in leading journals from 2006 to 2009.  Another 20 papers are currently in the works.  

Not only are these research efforts advancing the theoretical understanding of the creation and successful management of entrepreneurial companies - they are of relevance and interest to members of our entrepreneurial business community and Deming Center board.

And just for the record, I do believe that venture capitalists really matter.